Here’s a rarity: a chief executive turning down an annual bonus two years in a row out of solidarity with the suffering customers. But when the company is Pennon Group, owner of South West Water, the operation currently knee-deep in a diarrhoea and vomiting outbreak in Devon caused by polluted water, Susan Davy had little real choice. She cannot expect applause for leading “from the front” and “living our values”, as she described her decision to turn down £237,000 in cash.
In fact, the question is why she still thought it appropriate to collect £298,000 under her separate long-term share-based scheme. That award sent her overall pay up from £543,000 to £860,000, a figure that may cause stomach pain across the south-west, not just in the coastal town of Brixham, where the parasite cryptosporidium was found in the system.
A year ago, she saw the short- and long-term schemes as a job lot and waived both. If anything, the case for surrendering both elements of variable pay should have been more compelling this time because an outbreak of illness is bad even by the standards of the modern water industry. There was no explanation of the different logic in the annual report.
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A deeper question is why the bonus issue even arose in the first place. Why wasn’t it automatically reduced to zero in current circumstances? The answer lies with the usual suspect – the fact the standard “balanced scorecard” of objectives for an executive includes so many elements that it is hard to miss them all. In Davy’s case, the formula spat out a ratio of 46.5% of maximum, which the remuneration committee cut to 38.5% after applying its “discretion framework in respect of South West Water’s environment and pollution performance”.
Come on though, outsiders will still be baffled as to why the committee’s discretion could be so minor (and so precise). Even ignoring the parasite outbreak, South West Water is still falling substantially short on the Environment Agency’s most important annual measure: the company got two stars, when four is the aim, under the latest industry-wide environmental performance assessment.
Nor is it the case that Pennon’s shareholders are having a better time. Yes, they got a £127m dividend even as the Devon outbreak was in full swing, but the share price has roughly halved during Davy’s four years as chief executive. Not for the first time, one must ask what is the point of these “balanced scorecards” if they produce unbalanced outcomes that miss the wider picture.
In a month’s time, Ofwat, the sector’s economic regulator, will unveil its first view of the English and Welsh water suppliers’ business plans for the next five years, including the company-by-company increases in bills to fund greater investment. Bill rises are inevitable and South West Water is looking for 30%-ish, which may be at the lower end of the industry’s range but will still come as a shock to many customers. Davy should have read the room: if it was right to turn down short- and long-term awards last year, it was right to do so again. Half measures don’t cut it.